UN IRIN - West Africa for Fri, 4 Sep 1998

UN IRIN - West Africa for Fri, 4 Sep 1998



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Press Release (NEW YORK,1 September) Programmes providing small loans of a few hundred dollars or less to poor households should not be relied upon as an independent of a primary means of poverty reduction, cautions a United Nations report to the fifty-third session of the General Assembly, opening later this month.

Promising to unleash the entrepreneurial capabilities of poor people, and especially of poor women, at modest cost and with a minimum of bureaucracy, microcredit programmes skyrocketed to prominence in a decade of lowered expectations for the public sector. At a "Microcredit Summit" held last year in Washington, D.C., donors agreed to a plan that would extend small loans to 100 million poor households by 2005, counting on additional outlays of $26 billion.

The new report from the UN Secretary-General on "the role of microcredit in the eradication of poverty" (A/53/223) finds that much of this prominence owes to the succes of a relatively few institutions, including the Grammen Bank in Bangladesh, which reaches over 2 million people with cumulative lending of about $2,1 billion, and Accion Internaticional, with $1 billion, in loans to Latin Americans over the last five years. The capacity of such programmes to create employment oportunities, to introduce women who have been economically and socially marginalized into productive activities and to build self-reliance among the poor is recognized by the report. It also acknowledges their utility in countries where capital markets are in a rudimentary stage and commercial banks are reluctant to lend to the poor because of lack of collateral and high transaction costs.

But the report, prepared by the Division for Social Policy and Development of the UN Department for Economic and Social Affairs, cites studies which show that "there are limists to the use of credit as an instrument for poverty eradication, including.. the fact that many people, especially the poorest of the poor, are usually not in a position to undertake an economic activity, partly because they lack business skills, and even the motivation for business". Furthermore, many claims of high rates of repayment or of stable improvements in the standard of living of borrowers are not consistently or convincingly substantiated, despite the proliferation of literature in this area.

The report also warns against siphoning scarce development assistance funds away from crucial sectors like agriculture, infrastructure, health, sanitation and education for relatively untested microcredit schemes.

Some of the bugs found in the approximately 3,000 microfinance institutions which have sprung up in developing countries include: - in many developing countries, overall interest rates are relatively high to begin with, and when a stiff risk premium is added, microfinance charges can become quiet high.

- administrative structures are commonly either fragile or rudimentary, and sometimes involve large transaction costs. "If the transaction costs, combined with high interest rates, require that the operation in question generate profit margins of the order of 30 per cent to 50 per cent, it is not clear that this would be economically very beneficial", the report says.

- a recent alternative microcredit approach argues that loans should be extended to anyone who has the ability to repay, whether or not they have a credible plan for a small-business or informal sector enterprise. The risk of this "minimalist" approach, report indicates, is that borrowers will consume rather invest their capital.

- many microcredit schemes have been standalone operations, lacking support services or linkage with public sector activities, such as land reform, which may be a necesary condition for success.

To maximize the undoubted success achieved by many microcredit programmes, the report recommends that administrative structures should be strengthened; that loans should be provided in the context of access to land, appropriate technology, markets, self-help solidarity groups, counselling, etc., and that microfinance such be conceived as one component of an overall strategy to foster small busines enterprise.

An effective means of ensuring long-term sustainability in microcredit operations, the report suggests, is to include a savings mobilisation function, such as a credit union linked to the microfinance institution. Without long-term sustainability, a microcredit institution is in danger of collapsing or of becoming a thinly veiled charity.

The Secretary-General's report welcomes creation by the World Bank (which has a cicrofinance portfolio of $218 million) of the Consultative Group to Assist the Poorest to coordinate international microcredit efforts, collect reliable data and foster best practices.

"The CGAP process should be strengthened", the report says, and "the UN systems also needs to spread a more realistic notion of the potential of microcredit approaches, and to put them in the broader perspective of the fight to eradicate poverty".


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Date: Fri, 4 Sep 1998 13:10:26 +0000 (GMT) From: UN IRIN - West Africa Subject: UN report cautions on limits of microcredits, 98.9.4 Message-Id:

Editor: Ali B. Ali-Dinar

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